Hedge Fund That Shorted China’s Luckin Early Is Betting on Worse to Come

Bei Hu, Suzy Waite and Nishant Kumar BloombergMay 21, 2020


(Bloomberg) -- One of the first hedge funds to wager against Luckin Coffee Inc. is betting the stock’s 93% plunge this year has further to go.



Inventio Capital Management (Hong Kong) Ltd., led by Soros Fund Management LLC alumnus Wang Dawei, started shorting Luckin after its initial public offering in May 2019, adding to the position in April after the company became embroiled in an accounting scandal, according to a person with knowledge of the matter. The fund is still short after Luckin’s 36% tumble on Wednesday, the person said.

The coffee chain, which said this week that it may be delisted by Nasdaq Inc., has generated more than $1 billion of mark-to-market gains for short sellers this year, according to data compiled by S3 Partners LLC. Jim Chanos and Carson Block have both wagered against the stock, while hedge funds including CloudAlpha Capital Management Ltd. and FengHe Asia Fund made money on Luckin shorts in April.

Once seen as one of China’s brightest growth stories and the homegrown answer to Starbucks Corp., Luckin’s disclosure in early April that senior executives may have fabricated $310 million of sales has plunged the company into crisis.

Luckin’s fall from grace has made it a poster child for concerns about Chinese corporate governance, fueling a debate in Washington over the extent to which U.S. money and capital markets should be accessible by firms from a growing geopolitical rival. The Senate overwhelmingly approved legislation Wednesday that could lead to Chinese companies being barred from listing on U.S. stock exchanges.

Inventio initially bet against Luckin because it viewed the company’s business model as flawed. It also didn’t like the fact that the company reduced its information disclosure within months of its IPO, as well as what it saw as excessive market expectations that created the wrong sort of incentives for staff, the person said, declining to be identified discussing private information.

By mid-January, Luckin had become one of fund’s largest bearish stock bets. It contributed about a third of Inventio’s 15% gain from short positions in the first four months of this year. The overall fund is largely flat this year, the person said.

CloudAlpha Capital Management’s Luckin short accounted for about a quarter of the fund’s 4.2% net gain in April, according to a monthly update sent to investors. The trade drove nearly a third of the 1.5% April return at FengHe Asia Fund, the Singapore-based firm said in a note to investors.

“We did not short Luckin due to suspected fraud,” FengHe said in its investor newsletter. “We were of the view that Luckin could not sustain its extreme loss-making fast expansion business model and foresaw that its financials will come down significantly.”

Luckin’s strategy to take on Starbucks involved the Xiamen, China-based company opening more stores in two years than its Seattle-headquartered counterpart has done in two decades. The breakneck expansion has continued even after the revelation of potential fraud.

FengHe covered most of its short position in late March when the stock fell below its price target of $30 and closed out the remainder in early April, fearing a prolonged stock suspension or a forced delisting could make it difficult to take profit on the trade.

Asset managers that lost money from bullish bets on Luckin included Stephen Mandel’s Lone Pine Capital LLC. The Greenwich, Connecticut-based firm lost 2% of its capital from an 11% stake in Luckin after the coffee chain’s share price collapsed in April.

Tybourne Capital Management (HK) Ltd. also lost money on the 2.1 million Luckin shares it bought in the first quarter and has since sold, according to a regulatory filing, and another person with knowledge of the matter. The Hong Kong-based firm, which oversees more than $6 billion in a long-only fund and a hedge fund, didn’t suffer a significant loss from the investment. Its $3.1 billion hedge fund gained nearly 14% in April, that person said.

Luckin Chairman Lu Zhengyao said in a statement on Wednesday that he’s “deeply disappointed” Nasdaq is moving to delist the shares before his company releases final results of an internal probe into its accounting.

https://www.bloomberg.com/news/arti...is-betting-on-worse-to-come?srnd=premium-asia

 

Unclear how much they are short.

 

• Coffee startup's downfall escalates China Inc's Wall Street issues

The US fired its latest shot across the bows in an escalating rivalry with China when the Senate overwhelmingly approved a bill that could lead to Chinese companies being barred from listing on US stock exchanges, although few expect China Inc to abandon American venues entirely.

Relations between the world's two largest economies have deteriorated markedly in the past few months, with tensions spilling over into Chinese companies' access to the US capital markets in the wake of the rapid downfall of Luckin Coffee, one of China's brightest startups, as a result of accounting fraud.


Chinese companies find the allure of US markets - with their better liquidity and deeper investor base - hard to resist.Credit:AP

Last month, the company revealed that an internal investigation had shown that its chief operating officer and other employees allegedly fabricated about 2.2 billion yuan ($470 million) in sales transactions.

The bill passed on Wednesday (US time) would require companies to certify that they are not under the control of a foreign government or submit to audits from a US accounting agency to determine that. China's refusal to let the Public Company Accounting Oversight Board examine audits of firms whose shares trade on US exchanges has long been a bone of contention between the two sides and the Luckin Coffee debacle has brought it back to the fore.

But while the environment for Chinese companies in the US has become decidedly more hostile of late, the allure of US markets - with their better liquidity and deeper investor base - is unlikely to go away.

"It will be a delicate balance for investors weighing between the risks here," said Jingyi Pan, market strategist at IG Asia. "The US may not drop off as one of the top IPO destination for Chinese companies, long seen as a highly liquid avenue which also helps in boosting the company's attractiveness. That said, worsening of US-China ties could trigger considerations of alternatives in Europe and closer to home in Asia."


The rapid downfall of Luckin Coffee, one of China's brightest startups, has escalated tensions between the US and China.Credit:Alamy

A string of disappointing debuts by Chinese firms on US exchanges last year also fuelled angst among investors and policy makers, while some global banks began dropping off deals, concerned about rising reputational risks. Of the 12 companies that listed in New York this year, just two are trading above their IPO prices, according to data compiled by Bloomberg.

Baidu, which runs China's top search engine, is considering delisting from the Nasdaq and moving to an exchange closer to home to boost its valuation, Reuters reported on Thursday, citing three unidentified people familiar with the matter. A Baidu spokesperson in Beijing described the story as "a rumour" and declined to comment further. Baidu's shares swung between gains and losses in New York trading.

"The recent Senate vote shouldn't be seen as a bluff or an expression of temporary pique," said Brock Silvers, chief investment officer of Adamas Asset Management. "The 'Chinese exception' of reduced auditing access won't last for long. Nasdaq has offered a solution, but one which may not actually eliminate the loophole. No matter which party wins the election, China may face de-listings should Beijing's regulators not give ground."

The latest move by the US could, however, prove to be a boon for rival exchanges like Hong Kong, which have sought to position themselves as alternatives for Chinese companies seeking international capital. Several US-listed Chinese technology heavyweights, such as JD.com and NetEase are already gearing up for second listings in the financial hub and the trend may accelerate as the US becomes more hostile. Alibaba has already done so, raising $US13 billion ($19.8 billion) in a massive share sale last year, which both gives it a listing venue closer to its home market as well as providing a hedge against risks from increasing US-China tensions.

Shares in Hong Kong Exchanges and Clearing have risen 7.4 per cent this week, helped by news that the bourse is planning to speed up the IPO process to bring it more in line with other international markets.

"Now that conditions to list in the US are getting more difficult, many Chinese companies are likely to choose Hong Kong instead. The reforms in Hong Kong will welcome those Chinese ADRs as secondary listings, and unlisted weighted-voting rights companies will be able to have primary listings in the city," said Banny Lam, managing director at CEB International Capital.

Bloomberg, wires